This time last year, the proposed 74p per share offer from Ellucian to acquire Tribal Group made a lot of sense.

Tribal and Ellucian occupy the top two spots in the UK higher education market for Student Information Systems (SIS) – student portals that centralise all the things you need at uni; the timetable; module content; recorded lectures and so on. The prospect of both companies combining into a single, leading SIS provider would have made them one exceptionally powerful force, for sure, especially at a time when more institutions think about upgrading to cloud-based systems and which vendors to choose to help them do that.

But an American player in the space, Jenzabar, wasn’t going to just let this happen. Under UK takeover rules, Ellucian’s bid required 75% approval from Tribal shareholders in order to pass, and Jenzabar, already holding a significant 21% stake, got to work immediately, increasing to 26.45% – enough to successfully block the deal. Tribal’s share price was just 50p before Ellucian’s offer, but more intriguing than the immediate loss has to be this bold, price-insensitive intervention to derail a merger of companies operating in an entirely different region to one’s own. What’s behind Jenzabar’s actions?

Digging Deeper

Jenzabar’s motives for holding an existing stake — and then boosting it further to block this bid — weren’t fully clear at the time, and in some ways, they still aren’t. Jenzabar is a privately held business with no obligation to open its books or make comment, but UK FCA rules did require that when it passed the blocking stake threshold, it had to declare whether or not it intended to make an offer of its own. The answer was “no”.

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The SIS market is undergoing a fundamental shift. For years, universities have relied on traditional enterprise systems to manage student data, but the pandemic necessitated a move toward the cloud model as it supports remote learning. The software providers aren’t complaining. Newer systems offer universities more flexibility in how they fund IT infrastructure. The costs can now be tied to student fees, which in turn for vendors means higher margins and more predictable, recurring revenue streams, rather than lump-sum capex payments. Just 5% of universities had adopted cloud-native SIS as of mid-2022, leaving most of the market untapped. There are very high switching costs in SIS, so Jenzabar, which has proven itself with cloud implementation, may well look at the presence that Tribal has in the UK as a neat gateway to international expansion of its cloud-based product suite.

There are many reasons someone would sell a stock, but only one reason to buy.

This quote is usually summoned up when talking about insider trading, but it’s worth keeping in mind as we try to get into the minds of Jenzabar management. When an investor goes out to buy shares, the implication is obvious: they believe the price will rise. But if your goal is to compete, holding shares in the very company you’re up against feels almost counterintuitive. Blocking a buyout of that company doesn’t typically generate profits either – unless the ultimate goal isn’t profit from a passive investment, but outright ownership.

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If Jenabar’s plan is to secure outright ownership, they’ll incur cost in the meantime to prevent others taking control.

Consider how much Tribal has cost Jenzabar so far. Their initial investment in 2013 was when the share price climbed from 80p to 140p. If they paid £1 a share, their 13% investment would have cost around £18 million. The share price today is 40p, marking a paper loss of £10 million (£19 million inflation adjusted). That capital could have been put towards reinvestment in growth, deleveraging or a dividend, but instead Jenzabar has doubled down again, raising their stake at more expensive levels than where we trade today. This behaviour points to what has to be a long-term strategy, as there aren’t any rational capital allocators who would accept the cost and volatility involved in holding a UK micro-cap merely to keep their options open. I think it’s much more likely that Jenzabar sees Tribal as a serious acquisition target and will – once the timing is right – make a bid.

Time In/Timing the Market

We’re a year on from Ellucian’s thwarted takeover attempt. What’s changed in a year?

Jenzabar’s reluctance to bid so far likely stems from internal issues at both companies – namely, the divorce of Jenzabar’s co-founding couple, fraud scandals at the top, and disputes between universities and Tribal after failed implementations of their cloud-based SIS.

For Jenzabar, the past year has been marked by the separation of the co-founders Chai Ling and Robert Maginn. In their unfortunately well-publicised divorce, private life spilled into professional and Jenzabar was the proverbial child in the middle. Ling, headstrong and outspoken, pushed for the CEO role, but Jenzabar has faced costly legal battles and accusations of religious discrimination under her leadership in the past, so in the end, Robert Maginn got the job. If he can stabilise the company internally, it may find itself with a clear enough slate to seriously consider M&A.

Tribal, on the other hand, has been grappling with its own brand of complexity. The shift toward cloud-native SIS has proven to be both an opportunity and a challenge – a real challenge. Large-scale rollouts of cloud tech are complex, especially with functionality gaps, security concerns and the need to keep legacy systems online throughout the transition. When something goes wrong, it often goes really wrong, and this seems to be the issue in Tribal’s contract termination with Nanyang Technological University (NTU) in Singapore. The split resulted in demand letters from NTU for damages, and while Tribal continues a mediation process, it could end up in court if talks fall through. This kind of noise, coupled with £1.4 million in costs linked to the failed Ellucian takeover attempt, has left Tribal’s profit figures looking rather bleak – approx £1 million this year.

Making a Move

From a strategic perspective, the more Tribal struggles with SIS, the more it could rationalise Maginn’s motivation to take control.

Tribal hasn’t set aside any provision for the potential NTU lawsuit and the firm’s reputation for cloud implementation is looking shaky. Should NTU mediation break down, a steady erosion of shareholder value becomes a real risk. 

Then, given the sunk cost, Jenzabar might deem it necessary to take over. As a much larger company, it has the resources to support Tribal through a legal case which would otherwise require going to market and issuing shares. If Tribal were to go that route, it could potentially dilute Jenzabar’s ownership to below the important 25% threshold, opening the door for circling sharks like Ellucian again.

The upshot is this: if Tribal does well and the share price increases, great, but if it goes the other way, Jenzabar has the most to lose. It’s signalled a strategic interest already by blocking the Ellucian deal and I believe Maginn would accelerate plans to bid if faced with the prospect of wasting what has been already committed. Jenzabar – unless willing to swallow a massive loss – should acquire Tribal and cover our downside risk.

And the Upside? A Simple Takeover

Practically speaking, Tribal shareholders would likely accept any bid from Jenzabar. It would offer a way out, saving them from waiting endlessly on Jenzabar to abandon its blocking stake – something that seems very far-fetched now.

One other point worth noting: even if Jenzabar hadn’t blocked Ellucian earlier this year, the UK Competition and Markets Authority (CMA) opened a minor antitrust review of the merger – a wrinkle that could have slowed things down anyway. As a US-only player, Jenzabar brings no such risk; their acquisition would avoid CMA scrutiny altogether, which, in the end, would make a bid from them a very clean outcome.

So, Jenzabar holds all the cards. They’ve effectively boxed out Ellucian, secured their spot as Tribal’s only realistic acquirer, and have a clear path to gobble up the micro-cap whenever they choose. After a decade on the sidelines, I’d say we’re nearing the right moment.

Long £TRB